What happened last week?
Mortgage backed securities (MBS) lost 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
Just about all the economic data last week would have justified a larger sell-off in mortgage backed securities which would have driven mortgage rates upward. But international events continued to provide fantastic demand for our MBS and as a result kept rates low.
The primary force driving foreign dollars into U.S. bonds (and therefore keeping rates low) is global concern over a “Brexit.” That stands for the potential Exit from the European Trade Union by Great Britain. Polling results last week showed that the “leave” votes look to outnumber the “stay” votes by 10 points and has been trending upward, whereas a month ago the “stay” vote looked to have a commanding lead. The vote will be June 23rd and has basically frozen the markets with fear over the economic fallout if Great Britain were to leave.
Jobs, Jobs, Jobs
Initial Weekly Jobless Claims were lighter than expected, coming in at 264K vs estimates of 207K. The more closely watched 4 week moving average dropped below 270K (269.5K). Continuing Claims were also lighter than expected (2.095M vs estimates of 2.171M). So, the positive trend of every single jobs related report continues which means that the NFP report is bubkis.
The April Job Openings and Labor Turnover Survey (JOLTS) showed 5.788 million jobs that are UNFILLED and was much higher than the market expectations of 5.672M and a nice jump over March’s revised 5.67M. So, if there are basically just under 6M jobs that are unfilled, how can the number of jobs added as reported in last week’s Non-Farm Payroll report be only 38K? Does it jive at all? Only if the answer is a very tight labor market.
Unit Labor Costs jumped up 4.5% which was higher than market forecasts of 4.0% and follows Q4’s jump of 4.1%, so there is clearly a strong trend in wage growth with this report.
The April reading was six times higher than estimated (0.6% vs estimates of 0.1%). The Fed has said very clearly that they are 2nd quarter data dependent and this is a reading that will cause economist to upwardly revise their estimates for 2nd quarter GDP.
The Talking Feds
Yellen is Yelling: As expected, she walked a fine line and seemed to try to caution the markets about getting too excited about the upcoming economic projections and dot plot chart that will hit next week. She said, “Next week, concurrent with our policy meeting, the FOMC participants will release a new set of economic projections. Those could, of course, differ from the previous set of such projections in March. But speaking for myself, although the economy recently has been affected by a mix of countervailing forces, I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.”
Regarding the weak NFP report, she said, “Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report.”
Atlanta Fed President Dennis Lockhart told Bloomberg today that he still sees enough Fed meetings left in the year with enough economic data to hit to potentially still see three rate hikes but he felt more confident that there would be at least two. Asked about June…he said that it would be difficult for him to support a hike due to the uncertainty of the “Brexit” vote.
Boston Fed President Eric Rosengren still sees rate hikes on the table despite the jobs report, although June is less likely.
Across the Pond
Japan: Their largest bank has said that they will stop purchasing Japanese bonds. This is a big deal and it certainly is driving money into U.S. bonds.
What’s on the agenda for this week?
Global bond market “Brexit, Brexit, Brexit”: The markets are very concerned about this event next week. As a result, we will continue to see elevated pricing this week but do not hold out for a rally. A rally (into the danger zone) can only occur if Great Britain does leave on June 23.
The Big Three
The three items that bond traders will be paying very close attention to this week are (1) Brexit, (2) Fed Policy Statement and (3) Retail Sales
(1) Brexit: This is the number one force in the elevated pricing this month. The bond market will be reacting in lock-step with polling data. The higher the “leave” vote is in the polling data, the better it is for pricing.
(2) The Fed: The bond market has September pegged as the next time the Fed will move with another rate hike but it’s clear the data is there for one in June or July. Everyone (including many vocal Fed voters) have said that their hands are tied prior to the Brexit vote, so June is out. But very close attention will be paid to their Economic Projections and Dot Plot Chart which aggregates each FOMC member’s own internal projection on future interest rates. There will also be a live press conference with Janet Yellen.
(3) Retail Sales: This is actually a very big week for economic data but Retail Sales will get the most weight. Consumer Credit was disappointing and Consumer Sentiment seems flat which would point to a lackluster report, but wages are up and that could point to a strong report.
Across the Pond
Germany: The German 10 year bond is currently at 0.025% which shows that its “risk off” in Europe as cash is being parked there ahead of the Brexit vote.
Short and sweet today. MBS have done nothing (yes +11 is nothing…you need +21 or more for pricing to move). There were no major (or minor) domestic economic reports and no Treasury auctions to guide trades so MBS are effectively in a holding pattern until at least Wednesday and more probably until the June 23 Brexit vote.
On Deck for Tomorrow: Import and Export Prices, Retail Sales and Business Inventories.